Bonus Structures: How to Choose and Implement One for Your Business

If an employee bonus structure is what you're looking for, you've landed on the right page!

But with so many options available, such as signing bonuses, retention bonuses, holiday bonuses, and profit sharing options, we understand it can be overwhelming.

In this article, we'll navigate various incentive programs, so that when it comes time to reward employees, you'll be better informed.

The main thing you need to remember is a company bonus structure is based on a corporation's profitability. Discretionary bonuses, for example, are given at a business owner's discretion as a way to publicly acknowledge exceptional performance. Alternatively, profit sharing is dividing up the (profit) pie among eligible employees and stakeholders.

Let's take a look at everything you need to know about bonus structures.

What is a Bonus Structure?

A bonus structure is a formal plan that links employee compensation to specific operational or performance metrics. It goes above fixed salaries to incentivize employees, boost results, and ultimately fuel the company's success.

In simpler terms: Bonuses are categorized by any additional compensation over an employee's base salary. This can be in the form of overtime, salary increases, healthcare benefits, sales commissions, or an annual bonus.

According to a 2022 Zippia report, 33% of American companies offer year-end bonuses. The report also noted that average annual bonuses for full-time workers were 11% of their base salary, and 6.8% and 5.6% for part-time and hourly wage employees respectively.

An employee bonus plan can be structured in various ways and doesn't always have to be a monetary payout. Other types of bonuses include healthcare and well-being benefits, and housing allowances, to name a few.

The importance of a bonus program not only makes employees feel valued and appreciated but fosters a collaborative workforce that aligns employees' interests with shared business goals. It's a win-win situation for employers and employees, which we'll cover next.

Why implement a bonus structure?

According to a 2019 Payscale report, more American businesses are utilizing employee bonus structures, over and above 'usual' benefits (e.g. health insurance).

Think of an employee bonus structure as an investment in your company's future. When you reward employees, they feel valued and appreciated and are more likely to stay with your company for the long haul.

Let's take a quick look at three top benefits:

Motivation and retention

• 60% of U.S. organizations have implemented merit-based rewards to retain top-talent employees, as per a Payscale study.
• According to a United Insurance report, 78% of employees are more likely to stay with a company based on the benefits they offer. 40% of employees said their loyalty to the company would increase if benefit programs were customized to their preferences.

These statistics show that employee bonus structures directly link to retaining top talent and increased job satisfaction. Offering tailored performance-based bonuses creates a tangible connection between effort and financial gain for employees.

Performance enhancement

• In a BucketList report, 40% of U.S. workers said they would put more effort into their work if they were acknowledged more often.

• A Gallup study estimates that low employee engagement costs the global economy $8.8 trillion!

Aligning eligible employees with specific performance goals, which then translate into a bonus amount, establishes a clear roadmap for success. Employees understand what actions directly contribute to their rewards, encouraging them to put in the extra effort.

Employee satisfaction

• According to a CV City study, highly engaged/satisfied employees are 81% less likely to call in sick.

Rewarding employees fosters a culture of appreciation and is crucial to a company's success. When employees feel valued, it translates to higher job satisfaction, leading to improved teamwork, communication, and overall workplace morale.

We'll cover the various bonus options next.

Types of Bonus Structures: Choosing the Right One for Your Business

If you want to boost productivity and motivate employees, a powerful employee bonus plan can be the secret weapon in your arsenal.

Figuring out a system that works best for you and your business can seem overwhelming.

The good news? We've put together a list of bonuses available to streamline the process for you.

Bonus structures for employees can be based on various factors, such as the duration of service or performance. "Bonus pay" can be monetary, non-financial benefits, or a blend of both.

Here are a few bonus structure examples:

1. Profit sharing bonuses

Profit sharing is when employees - or profit sharing partners - receive a portion of a company's profits. The profits are distributed once certain operational criteria have been met. One of the major [benefits of profit sharing] bonuses is that it is a win-win situation - employees gain financial rewards and companies reach their objectives.

This bonus pay can be paid in one of three ways:

1. Annual bonus
2. Part of retirement plans (401k)
3. Quarterly or bi-annual payouts

Pros

• Attracts (and retains) top talent
• Promotes long-term company loyalty
• Increases employee engagement and motivation
• Improved productivity and operational success
• Tax deductible for employers
• Employees have a sense of ownership (i.e. they start to think like a business owner)

Cons

• Relies on the company's profitability
• The administration process can be complex
• Employees are unable to pay into profit sharing accounts
• Profit share payouts are taxable for employees

2. Performance bonuses

[Performance bonuses] directly tie rewards with achieving specific business goals. It fosters a competitive spirit among teams that targets employee motivation and drives results. Here are a few examples:

• Sales bonus: A commission structure motivates sales teams to exceed sales targets. This bonus payout can either be percentage-based, say 5% or 10% of total sales, or a fixed rate (say $250 regardless of the number of sales).
• Project-based: These can be individual or team bonuses. Employees are rewarded for reaching key project benchmarks.

Pros

• Rewards directly link to employee effort
• Offers flexibility with customizable metrics
• Promotes individual employee accountability
• Boosts team engagement

Cons

• Can potentially cause inner-team conflicts (i.e. rivalry or jealousy)
• May not foster teamwork

3. Recognition bonuses

Recognition bonus structures shine the spotlight on exceptional performance. It's giving employees a 'pat on the back' for a job well done.

This employee bonus structure may look like:

• Employee of the month awards - publicly acknowledging individual performance.
• Peer-to-peer gifting - empowering teams to celebrate and nominate other's successes.
• Spot bonus/discretionary bonus - given "on the spot" when managers or business owners feel credit is due.

Pros

• Provides instant recognition
• Cost-effective bonus structure
• Boosts morale and job satisfaction
• Enhances healthy competition between employees

Cons

• The selection process can be tricky - avoid favoritism
• Overemphasizing short-term wins could overshadow long-term business goals

4. Non-monetary incentives

Get creative with non-financial bonus structures that cater to the diverse needs, and preferences of your team. These include:

• Ability to earn paid time off (PTO)
• Flexible scheduling to enhance work-life balance
• Wellness programs, such as spa days, corporate sporting events, or discounted gym memberships
• Healthcare and dentistry benefits
• Car and housing allowances
• Cellphone/laptop contracts
• Education or tuition reimbursements
• Retirement annuities

Pros

• Certain benefits, like retirement and healthcare plans, are tax-deductible
• Cost-effective employee bonus plan options
• Caters to a wider range of employee preferences and acts as a magnet for top talent
• Enhances employee well-being

Cons

• Managing various plans can be time-consuming
• Not all employees may value non-financial incentives equally
• Measuring the return on investment (ROI) can be difficult

5. Other incentives

• Holiday bonus - incentivize employees between the holiday(s).
• Signing bonus - given to employees when they first join the company.
• Referral bonus - reward employees when their nominated candidate is hired for the job (after they have completed their probation period).
• Severance bonus - given to employees who have worked at the company for an extended period, such as five, 10, or 20 years.
• Attendance bonus - given annually to the employee(s) with the lowest absenteeism record.
• Wage increase - increase employee's annual base salary.

Now that we've explored the diverse landscape of employee bonus plans, let's move on to how you can implement a successful strategy for your business.

How to Implement an Effective Bonus Structure

Whether you opt for retention bonuses, signing bonuses, or plan to increase an employee's base salary - a clear vision is what sets the foundation for the success of any type of employee bonus plan.

Setting clear goals and expectations

• Choose the right type of incentive program that caters to the wider team. Consider a blend of monetary and non-monetary bonuses.
• Define specific, measurable, achievable, relevant, and time-bound (SMART) goals
• Align company objectives with employee preferences. Do they value paid time off, cash incentives, or flexible work hours?
• Use clear language to explain bonus structures to all employees. This reduces the risk of misunderstanding (or potential legal disputes).
• Involve employees in the bonus structure planning. Get feedback from workers across all departments of your organization to foster a sense of inclusion.

Regularly reviewing and updating the bonus structure

• Review the effectiveness of employee bonus structures often. Conduct surveys to gauge how employees and managers feel about the respective plan(s).
• Adapt bonus structures as the company evolves. Be prepared to adjust goals, benchmark metrics, or the entire structure to align with the economic landscape.
• Keep communication channels open and transparent. Attend to any grievances and concerns ASAP.

Common Mistakes to Avoid When Implementing a Bonus Structure

Even the most well-thought-out bonus structures can hit unexpected bumpy roads. Here's a list of common pitfalls to avoid:

Not communicating the bonus structure clearly

Remember, clarity is king if you want to avoid any misunderstandings or misinterpretations.

• Develop a communication document outlining the structure, eligibility, payout method, and calculation formula.
• Utilize board meetings, webinars, and brochures to effectively explain bonus structures to employees.
• Get regular feedback - say once a month - from managers and employees on how the bonus structure is received.

Not aligning the bonus structure with company goals

A successful employee bonus structure encapsulates company values, morals, and goals.

• Every bonus plan must contribute to broader company objectives. If you want to reduce wastage in your manufacturing business, for example, then incentivize employees based on this operational goal.
• Revisit bonus structures to ensure they align with your business's evolution. Keep plans updated and relevant at all times.
• Monitor and track performance data to ensure it benefits the company's profits and success.

Get Help Implementing Profit Sharing in Your Business

ShareWillow understands the complexities that come with monitoring and tracking bonus plans for employees. Whether you offer a referral bonus or an annual bonus, the admin behind the scenes can be overwhelming.

Leveraging our profit sharing template streamlines the process for you. Our fast, efficient software has business owners in mind, taking the headache (and sleepless nights) out of employee bonus structures.

FAQs

Is a retention bonus and a severance bonus the same thing?

No. A severance bonus is given to long-term employees upon termination of their employment, but not when employees resign. This bonus pay is usually a 'thank you for your service' and is typically equivalent to one week's pay per year of service.

A retention bonus, on the other hand, is given to employees to 'retain them'. In other words, employers incentivize workers with a bonus to foster long-term commitment.

What is a referral bonus?

A referral bonus is given to employees who have successfully assisted with new hires. Often, businesses will ask current employees to nominate candidates for various upcoming positions. If an employee's nomination successfully fills the position, they're usually rewarded with a referral bonus (after the probation period).